Losing the American Dream

I just read an article on the American Dream, that questions whether it is still obtainable.  The American Dream is a poorly understood concept. Originally, it referred to the fact that destitute immigrants could go from poverty to wealth during their lifetime, if they were willing to work for it.  Now, each person understands it differently.  Going by the original meaning, however, I think it is truly dying.  Even many of our current politicians recognize that economic mobility in the US has decayed dramatically.  Some researchers have even found evidence that Canada and most of Europe provide higher economic mobility than the US.  If you really want a chance at the American Dream, America is not where you want to be.

The article cites a study by Pew Charitable Trusts' Economic Mobility Project.  According to the study, 43% of the economic bottom 20% stay in the bottom 20%.  It also says that 93% of those in the bottom 20% do better than their parents.  It does not state exactly what this means, however, and I would like to look at this closer.

According to the study, the bottom 20% of households make less than $28,900 a year (it does not qualify the number of dependents in a household).  They say that 93% of the bottom make more than their parents.  I would like to know if this is based on dollar amount, or on inflation adjusted income.  This is important, because the money that my parents made 20 years ago was worth more than my money is now, based in inflation.  (I use 20 years, because comparing the wages of an employee with 20 years work experience with one with none cannot yield a reliable conclusion.  This assumes that there is only a 20 year age difference between parent and child.  If there is more, the difference is more dramatic.)  For example, total inflation from 1992 to now (2012) is 64%.  This means that if I make $28,900 a year, my parents would have had to make less than $17,622 in 1990 for me to make more than they made.

Inflation is extremely important here.  If you account for inflation, the claim that the lower 20% is earning more than their parents is false.  Most are earning less.  I have mentioned a statistic in a previous article that I feel I should repeat.  From 1960 to 2010, total average inflation is 659%.  For the lower 75%, average wage increase is only 75%.  Unless the wages of the lower 20% have increased by much more than the rest of the lower 75%, then they are earning far less than their grandparents did.  Our economy has not improved dramatically over this time, so this is very unlikely.  (Admittedly, minimum wage does tend to increase a bit faster than the natural wage increase, so the lower 20% may have seen faster wage increases than the rest of the lower 75%, but it is not anywhere near enough to make up the difference.)

So, to my primary point: economic mobility.  I have had conversations with strong conservatives on the subject of fair wages.  One argument in favor of less regulation of wages is that we can always get a job somewhere that pays better.  Also, if we don't like our local economy, we can move.  Lastly, if we cannot get a good paying job, we can freelance, or start our own business.  The first of these is only ever true in an economy with very low unemployment and high demand for labor.  We have not had this kind of situation in the US for decades.  The second argument is a lie.  If we cannot make enough to survive in our local economy, how do you think we can afford to move somewhere else?  The third is true, but has a very low chance of success (most small businesses fail within the first year).

Economic mobility is the ability of an individual to change economic levels within an economy.  High economic mobility, which we had when our country was founded, gives the poor the ability to rise from poverty to become self sustaining, or even wealthy.  It also often implies higher risk of failure to the very rich.  High economic mobility requires those with wealth to keep working and to use their money wisely, if they wish to stay wealthy.

Low economic mobility is the opposite.  It makes it difficult or impossible to rise from poverty.  It also places the wealthy in positions of power that make it difficult for them to loose their wealth, even if they spend unwisely and do no useful work.

Obviously, high economic mobility is better for the poor and worse for the rich, while low economic mobility is good for the rich, but bad for the poor.  An example of high economic mobility (which has been fairly rare throughout history) is the US in its first half century, where starting your own business was fairly easy and where you could build a farm and grow your own food if you could not get a job.  An example of low economic mobility is old England, where surfs were bound to the land, and were taxed anything beyond what they needed to feed themselves (and often a bit more).  So, where are we now?  The US has lower economic mobility than most other first world countries.  In most European countries, it is easier to escape poverty than in the US.  You might ask if low economic mobility is really the problem, or why it is so bad.

Economic mobility has many different levels.  If it is too high, it could result in dramatic economic instability.  If it is too low, it results in even worse problems though.  The first is that it hinders economic freedom (the single most important reason that most people immigrated to this continent both before and after it became a country).  In our country today, can I survive without relying on a large corporation?  Even if I own my own business, I cannot.  I have to rely on them for supplies for my business, as well as for my day to day needs.  Now, this is not entirely bad, but what happens if they raise the prices for food a lot?  Can I make my own at a reasonable cost?  Can I start my own grocery store to compete with them?  The answers are no, I cannot.  If economic mobility were high, I could at least start my own competing store.  Unfortunately, the barriers to entry are so high that my chance of success, even with very good resources, are less than 50%.  This is partially because small businesses don't get the huge tax cuts that large ones do.

Second, it causes money to flow towards the top.  Right, you have heard this before.  You might be skeptical of its validity.  Let me explain why this is bad.  First, when money flows towards the top, it stays there.  Contrary to what businesses claim, most profits do not go to pay individual workers.  When money gets to the top, it is used to invest, to buy bulk supplies, and now days, to pay for intellectual property law suits.  Money that is invested is generally used for expansion.  This sometimes pays for more jobs, but more often it is used for buying new equipment, which is produced mostly by machine, with few human workers (I have nothing against automation, but I believe that the savings it generates should be distributed fairly).  Money that is used to buy bulk supplies primarily goes to pay for automated production, equipment, and raw materials that again are produced or harvested by machine.  Money that pays for intellectual property lawsuits never does anything useful.  It might pay the paychecks of a few already overpaid lawyers, but then it sits in the bank waiting for the next lawsuit when it might need to be paid to the next guy.  It just gets passed around between businesses.  The last thing that money at the top does is makes rich individuals richer.  These are people who invest (we've discussed this already), or just hoard the money.  Hoarding money hurts everyone.  Hoarding money removes it from the economy, reducing the amount of available money, but it does not destroy it, so the value of the remaining money does not increase (significantly anyhow).  This allows prices to increase, but money to decrease, which is worse than legitimate inflation or deflation.

The ultimate problem with money flowing to the top is that those who are not rich become too poor to survive.  When reduced money supply is not countered with deflation (the decrease of prices, or increase of value of money), the middle class is slowly reduced to poverty.  This results in reduced physical mobility, which prevents the poor from escaping to somewhere where they can survive.  This either causes them to starve, or forces them to provide more work than is fair for their wages.  This will decay until the poor cannot even survive on the wages they are getting for that.  When this happens, employee turnover increases as people are "burnt out" from too much work.  This is unsustainable.  Eventually, they will run out of employees to burn out.  Before this happens though, the diminishing spending power of the lower and middle classes will no longer be able to support the enormous business infrastructures that support the few rich.  In short, low economic mobility leads to economic disaster.

An example of this is the US over the last few years.  Banks have to buy debt (provide loans) to survive.  Money does not accrue interest on its own.  The banks got to a point where they were providing too many high risk loans.  At the same time, prices were increasing faster than wages (buying debt inherently raises prices as it increases the availability of money in the economy).  The result was that people began defaulting on loans, which destroyed many banks, and caused a small economic crash.  Sadly, we have not learned from this, and our economic mobility is further decreasing.

Low economic mobility makes economic recovery more difficult.  High economic mobility makes economic recovery almost unnecessary, as it allows holes to be filled very quickly.  When economic disaster does hit, high economic mobility makes recovery faster and less painful.

So, how do we increase economic mobility?  First, allow fair competition.  If we give large businesses advantages over small ones, it will be more difficult for small businesses to compete with large ones.  This allows large businesses to control prices which gives them power to hedge their markets against competition.  This makes it nearly impossible for a new business to compete.  If we even taxed businesses equally regardless of size, economic mobility would increase dramatically.

Second, slow or stop the flow of money to the top.  I recognize that businesses need money to operate, but they do not need to expand at the rates that most US businesses do (and excessive expansion eventually leads to disaster, when the bubble breaks and profits can no longer keep up with costs).  How do we do this?  I cannot say what would work best, but I have a few suggestions.  Many people promote progressive taxes for businesses.  To complement this, they also suggest more progressive taxes for individuals, so that less money is funneled to overpaid CEOs.  This would reduce the incentive for excessive profits at higher tax brackets, but it would instead funnel money into the government, which also often tends to push money upwards (necessarily in most cases).  I have previously suggested profit margin limits that incur fines if they are exceeded.  This would likely work fairly well.  With this, a wage cap would prevent excess profits from being given to those who do not need the money, which would prevent flow to the richest individuals.  I personally prefer this because it is more difficult to abuse than a tax based solution.

If you wonder why we have not already collapsed if this is all true, I can explain that as well.  We are well past the point where businesses refuse to pay wages that can support people.  We do still have a functional middle class, but it has shrunk dramatically, as a few have risen higher and the majority has sunk into near poverty.  The reason those in poverty can still survive is that the government takes up the slack of the businesses.  Our welfare system makes sure that the worst off have enough money for food and a place to sleep.  Unfortunately, it is not the government's responsibility to take up the slack of businesses.  The government is responsible for making sure that businesses treat people fairly, in a large degree, but any welfare should be for those with a legitimate problem providing for themselves or their family, not to make up what businesses cheat their workers out of.

We have lost the American Dream.  Microsoft, WalMart, and Apple are having their American Dreams, but at the expense of the rest of us.  If the American Dream is the opportunity to rise from poverty to sustainability through hard work, then why are the hardest workers often the poorest?  Many Americans' American Dreams are being stolen from them for minimum wage.  People like Bill Gates and the late Steve Jobs did not only take their American Dreams, but they took the American Dreams of millions of other Americans.  I don't have anything against wealth, but wealth at the expense of others is wrong.

The only way that the US can retain its economic superiority is through high economic mobility.  We are currently behind many other countries, some by a large margin.  There was a time when the US had the highest economic mobility in the world.  This made us into an economic powerhouse.  Now, Mexican farm workers are leaving the US, because they can find higher economic mobility in Mexico.  We are at the end of an era.  We can enter the next as either the most economically powerful nation in the world, or as a barely first world nation struggling to stay above imminent economic disaster.  Which shall we choose?

Lord Rybec